• Study of individual decision making units suh as individual, households, of firms,country, and study of entire economies.

• In the nineteenth centruy or great depression had non measure of aggregate activity
  
• they had to put together bits and pieces of information to try to infer what was hapening to the economy as a whole
  

National Income and Product Accounts

• Measure of aggregate out put have been published on a regular basis in the united states since 1947

• Gross Domestic Product (GDP)

• The measur of aggregate output in the national income account 

• value of final goods and services produced in organized market in the economy during a given period of time
• sum of value added ( in organized market during a given period of time
  
• the sum of all income earned in organized markets in a given period of time
  

• Example problem (page 20 or lecture one)that deminstrates the contruction of GDP
• look at the summarized table in page 20
  

• 100 dollars from the production of steel
  
• 200 dollars from the production of car
  
• which add up to be 300 hundreds but is this the aggregated output? yes or no
• no the 200 hundred is the aggregated output because the stell is an intermediate good ( used for the prodcution of car)
• once we coun the production of cars we do not want to count the production of the goods that went into the production od there cars
• counting intermediate good would be double counting
• This motvstes the first defintion of GDP

• The sale of stell took place in the new firm no longer recored
  
• the firm 2 sell the car for 200 dollars paying the worker 80 and 70 dollars which equals to 150 dollars
  
• profiting 20 and 30 dollars which equal up to 50 dollars
  
• this show the GDP is 200 and should stay at 200
  
• because we don't want our measure of aggregate output to depend on whether firms decide to merge or not
• roughly this is the way actual GDP number are put together
  

• GDP is the sum of value added in the economy during a given period
• see example problem from (page 21 and lecture one)
• firm one take material worth $ 0 and turned it to steel worth 100 so the value added by 100
  
• firm two take 100 dollar raw material amd turned it into car worth 200 so value added is 100
• 200-100=100
• GDP= sum value added 100+100=200
• aggregate value would remiain the same if the steel and car firms merged and become single firm.
  
• In this case we would not observe intermediate goods at all as steel would be produced and then used to produce cars with in single firm and the value added in the single firm would simply be equal to the value of car  200 dollar

• exactly what is suggests
• the value added by a firm is defined the value of its production minus the value of the intermediate goods used in production
  

• The 100 dollar value that added by the steel manufacture the 80 dollars goes to labor worker leaving 20 dollars for the firm
  
• The 100 dollar value that added by the car manufacture the 70 dollar goes to labor workers leaving 30 dollars for the firm
  
• if you add up the labor income 80+70=150
• if you add up the capital income 20+30=50
• if you add both labor income and caoital income the GDP would up to 200
  

• Some of the revenue go to pay pay worker

• after some of the revenue go to pay worker the rest goes to the firm

• Is the sum of the quantities of final goods produced times the current price
  
• Nomianl increase over time for two reason first the production of most goods increase over time
  
• Second the price of most goods also increase over time
  

• If our goal to measure production and its change over time we need to eliminate the effect of increasing price (change due to infilaion ) on our measure of GDP
• real GDP is constructured as the sum of the quantities of final goods times constant  rather than current price